KUALA LUMPUR – International credit ratings agency Moody’s said its view of Malaysia’s creditworthiness could be affected if the government restores fuel subsidies and the move reverses previous efforts to trim its overspending.
Anushka Shah, Moody’s lead sovereign analyst for Malaysia, stressed that the process would depend on what Putrajaya does — if it does intervene — to stabilise retail fuel prices in the country.
“We do not have clarity yet on what measures may be undertaken. However, to the extent that an increase in subsidies reverses the degree and pace of fiscal consolidation that has been projected for 2018, and without offsetting measures, we would view their imposition as credit negative,” the assistant vice-president and analyst at Moody’s Investors Service told Malay Mail Online in an email response.
Shah was asked if Malaysia’s credit outlook would be affected if the government is forced to intervene over pump prices, after eliminating direct fuel subsidies in favour of a managed float.
Following five consecutive weeks of increase in retail prices of petrol and diesel, Deputy Prime Minister Datuk Seri Ahmad Zahid Hamidi said on November 19 that the Finance Ministry is looking into the possibility of raising fuel subsidies and that it would be discussed at the National Economic Council’s meeting the following day.
On November 20, the Finance Ministry announced that the government would intervene if the petrol prices for RON95 petrol and diesel exceed RM2.50 per litre for three consecutive months, but did not elaborate on what measures would be taken.
Shah said Malaysia’s annual reduction of its budget deficit since 2010 indicates its “fiscal discipline has remained intact, even through oil price declines and a political cycle” and although a relatively high debt burden acts as a key credit constraint for the country.
While saying that reviving fuel subsidies could increase the strain on government funds, Shah also indicated the budget deficit may not be affected if further steps to help Malaysians with living costs are already accounted for in Budget 2018.
“A backtracking or reversal of past measures to remove fuel subsidies — in place since 2014 — would add a further strain on public finances,” she said.
Shah noted that Malaysia’s Budget 2018 has a 15 per cent increase in allocation for subsidies and social assistance, compared to a projected 6.5 per cent decline this year which takes into account the “weekly-managed float system for the lag in changes relative to global oil prices; as well as a rationalisation of cooking oil subsidies”.
“For next year, budgeted figures still take into consideration existing targeted subsidies, such as BR1M. To the extent that further measures to mitigate higher cost of living are already included in the Budget, future announcements may not have an impact on overall budgetary balances.”
Temporary benefits, slower deficit trimming
Jason Fong, RAM Ratings’ senior economist for sovereign ratings, said the direct impact of a reintroduction of fuel subsidies on Malaysia’s ratings would take into account the long-term economic benefits and fiscal cost of such a policy.
Fong noted that bringing back fuel subsidies indefinitely or fixing a retail price ceiling for fuel would give the government higher expenditure in the long-run, but noted that this could be balanced out with higher government revenue from oil.
“The fiscal cost of reintroducing fuel subsidies would be dependent on the mechanism and its operational timeline. Should retail fuel prices be capped at a certain level, or implemented without a timeline, it would likely impose a significant long-term cost to the government.
“Separately, a higher global oil price would increase the government’s fossil fuel-related revenues as the Budget had assumed an oil price of US$52 (RM214.15) per barrel. This increase in fiscal revenues would mitigate or offset the cost of fuel subsidies,” he said in an email response to Malay Mail Online.
He concluded that restoring fuel subsidies could result in slower efforts to trim Malaysia’s budget deficit, saying: “In summary, a reintroduction of fuel subsidies would probably slow Malaysia’s fiscal consolidation process but could impart some near-term, temporary, economic benefits.”
Earlier in the same response, Fong indicated that Malaysia could still have room to allow retail fuel prices to follow global oil prices.
He had also noted that RAM Ratings’ base case assumption does not project current oil prices to be maintained given global supply conditions as shown by the still-resilient rig count growth in the US, also stating that RAM Ratings assumes an average Brent spot price of US$55 per barrel for the year 2018.
“As household spending is expected to remain resilient supported by a low unemployment rate, there is considerable leeway in letting retail fuel prices reflect the global oil price. Consequently, the risk of sustained macroeconomic instability arising from higher retail oil price remains limited at this current juncture,” he said.
While saying fuel subsidies can address inflation, he noted that the effect of retail fuel prices on consumption spending is expected to be less pronounced especially in urban centres owing to the greater availability of public transport and ride-sharing services.
“The longer-term macroeconomic impact of a reintroduction of fuel subsidies would help anchor inflationary expectations but may come at the cost of increasing income inequality,” he said.
After five weeks of steady increase, retail prices dropped across the board this week with RON95 and RON97 petrol both going down by 8 sen to RM2.30 per litre and RM2.58 per litre and with diesel dropping by 2 sen to RM2.23 per litre.
These new prices are valid until November 29.
– Malay Mail